Wednesday, December 25, 2013

Merry Christmas!

Tuesday, December 24, 2013

Wikipedia...sigh

For better or worse, Wikipedia is a go-to site for information. Often it is quite good. Sometimes it is not.

I happened to notice over my Wikipedia entry this sentence about the student walkout several years ago:

"Mankiw published his class attendance at the end, and it showed more students showed up to class that day than on average class day, as many counter-protested by coming."

This is false. In fact, I do not even take attendance in ec 10 lectures. I know anecdotally that some counter-protestors did come to that class (as I noted in this article, the only thing I published about the walkout), but I have no idea of the numbers, and I did not publish anything like class attendance.

If someone could fix that sentence over at Wikipedia, I would appreciate it. And while you're there, add some (truthful) stuff about me. Consider it a Christmas present.

Monday, December 23, 2013

Returns to Skills Around the World

On average, a one-standard- deviation increase in numeracy skills is associated with an 18 percent wage increase among prime-age workers. But this masks considerable heterogeneity across countries. Eight countries, including all Nordic countries, have returns between 12 and 15 percent, while six are above 21 percent with the largest return being 28 percent in the United States. Estimates are remarkably robust to different earnings and skill measures, additional controls, and various subgroups. Intriguingly, returns to skills are systematically lower in countries with higher union density, stricter employment protection, and larger public-sector shares.

What the heck does this mean? The typical American spends more than a third of income on housing. Does that make housing unaffordable? Presumably not. What makes 10 percent the magic threshold for health insurance but not for other categories of crucial spending? Who are these experts, and what criterion do they use to determine what is affordable?

Probably what the sentence means is that people have become accustomed to spending less than 10 percent of income on health insurance and are unhappy when they have to spend more. But if healthcare costs keep rising as a share of national income, as many economists believe they will, then we will have to adjust our perceptions of what is affordable.

Addendum: The Times story, particularly the graphic, suggests that the implicit marginal tax rate some people face under the Affordable Care Act subsidies can sometimes exceed 100 percent. It is hard to believe that the law is so badly written as to have this feature, but that seems to be the implication.

If my favorite textbook hasn't simplified things enough for you...

Monday, December 16, 2013

On Measuring Changes in Income

To divert attention from the disastrous rollout of his health reform, President Obama has decided to change the national conversation to discuss increasing inequality. This phenomenon is not new--the trend started about four decades ago--but it is real and important. In case you are a new reader of this blog, you can find my personal views on the matter in this paper.

This national conversation has generated renewed attention to the highly influential Piketty-Saez data. It is worth pointing out, therefore, some limitations of these data, which have been stressed by Cornell economist Richard Burkhauser: The data are on tax units rather than households, they do not include many government transfer payments, they are pre-tax rather than post-tax, they do not adjust for changes in household size, and they do not include nontaxable compensation such as employer-provided health insurance.

Does this matter? Yes! Here are some numbers from the Burkhauser paper:

1. From 1979 to 2007, median real income as measured by pre-tax, pre-transfer cash income of tax units rose by only 3.2 percent. That is a paltry amount for such a long period. You might conclude that middle class incomes have been stagnant. But wait.

2. Households are more important than tax units. Two married people are one tax unit, whereas a couple shacked up are two tax units. We would not want to treat the movement from marriage to shacking up as a drop in income. If we look at households rather than tax units, that meager 3.2 percent rises to a bit more respectable 12.5 percent.

3. Now consider government transfer payments. If we add those in, that 12.5 percent number becomes an even better 15.2 percent.

4. What about taxes? The middle class received some tax cuts during that period. Factoring taxes in, the 15.2 percent figure rises to 20.2 percent.

5. But not all households are the same size, and the size of households has fallen over time. Adjusting for household size increases that 20.2 percent to 29.3 percent.

6. There is still one thing left: employer-provided health insurance, an important fringe benefit that has grown in importance. Adding an estimate of that into income raises the 29.3 percent figure to 36.7 percent.

So, during this period, has the middle class experienced stagnant real income (a mere 3.2 percent increase) or significant gains (a 36.7 percent increase)? It depends on which measure of income you look at. It seems clear to me that the latter measure is more relevant, but the former measure of income often gets more attention than it deserves.

Take this as a cautionary tale. When people talk about changes in income over time, make sure you know what measure of income they are citing.

Sunday, December 15, 2013

A T Shirt for Princeton Students

Princeton University--the ivy league school known for its policy of "grade deflation"--has been experiencing a small outbreak of Meningitis B, for which students are now being vaccinated. Hence, this T shirt:

Saturday, December 14, 2013

Bad News for New PhDs

Economics Ph.D.'s on the academic job market had fewer jobs to apply for in 2013 than a year earlier, according to new data from the American Economic Association.
The number of new academic job openings listed with the association fell 6.6 percent, to 1,924, in 2013. However, the number of nonacademic jobs rose slightly, from 856 to 866.
Overall the number of new jobs fell 4.3 percent in 2013, to 2,790.

Tuesday, December 10, 2013

EITC is better than the Minimum Wage

Suggesting that federal policy addressing low-wage work and low-income families has somehow failed because the minimum wage has not kept pace with inflation ignores the fact that we have moved away from a focus on the minimum wage — a policy with many flaws — and toward the earned-income tax credit. We shouldn’t be asking simply how much the real minimum wage has changed, but rather how much the combined income floor generated by the two policies has changed.To provide an example, the blue line in the figure below shows the wages received by a single adult worker earning the minimum wage and working full time throughout the year. This can be interpreted as the income floor established by the minimum wage. The red line shows the level of family income when the earned-income tax credit for a family with two children is added (all in 2012 dollars). The lower line illustrates the income consequences of the real decline in the minimum wage. But the upper line shows that, because of the sharp increase in the generosity of the earned-income tax credit, the combined effect of the two policies is that the real income of this family is as high or higher than it was in past decades — when the real minimum wage was relatively high — and much higher than it was in most of the intervening years.

Nonetheless, there are important differences between the earned-income tax credit and the minimum wage. The fundamental difference is that the earned-income tax credit aims benefits at low-income families with children, rather than simply low-wage workers. This is in large part its virtue, and it makes a lot more sense than the minimum wage’s focus on low-wage workers. Do we really care if a low-wage teenager in a middle-class family makes an extra dollar an hour? Economists of all persuasions in the minimum-wage debate agree that mandated wage floors do a bad job of directing benefits to low-income families. This is confirmed in recent research by my graduate student Sam Lundstrom, calculating who would be affected by increasing the current federal minimum to $8.25 from $7.25. He finds that only 21.3 percent of the affected workers would be in poor families, while 30.9 percent would be in families with incomes more than three times the poverty line.﻿

Monday, December 09, 2013

A Fun Quiz

For the holiday party for ec 10 section leaders, head section leader David Johnson prepared the following "quiz," which he has allowed me to share with blog readers. The quiz is open book, open internet. The winning team got 18 out of 20. Try your hand at it. I will post answers in a few days.

Good luck!

Ec 10 -- End of Semester "Quiz"

[Hint:Each Answer Has a Certain Ec10
"Flavor"]

1.For 35 years, Bob Barker welcomed those
who had "come on down" to this TV
game show.

2.New Ec10
soap opera starring Luke, Laura, and Francis Edgeworth.

3.First U.S.
car manufacturer to offer seat belts as an option.

4.Neurosis
shared by bus rides and margarine .

5.One-word
term for one's first apartment.

6.The result
of Atlas's misplacing his celestial sphere.

7."Careful!The Bayeux Tapestry's wall mounts are
loose!"

8.Can we use
this same phrase for the sensitivity of either crucifix or rosary bead demand to
the cost of the crucifix?

Saturday, December 07, 2013

The Progressivity of the Current Tax Code

Friday, December 06, 2013

Two Random Things That Made Me Smile

Bostonians still tell the story of the respectable society matron who was crossing the Common one day and ran into an old college chum she hadn’t seen for years. The matron was dismayed to see that her friend was obviously engaged in the world’s oldest profession. “My dear,” she said, “whatever has happened to you?” “Well,” said her friend, “it was either this or dip into capital.”

Thursday, December 05, 2013

The CEA Fact Checkers Miss One

Now, we all know the arguments that have been used against a higher minimum
wage. Some say it actually hurts low-wage workers -- businesses will be less
likely to hire them. But there’s no solid evidence that a higher minimum wage
costs jobs.

From my perspective, the last sentence is just incorrect. There is a lot of work by reputable economists that finds adverse employment effects of a higher minimum wage. In a poll of top economists, as many say they believe that the adverse employment effect is noticeable as those that say the opposite.

The president could have said there is no completely decisive evidence. Or, more accurately, he could have said there is mixed evidence. But saying there is no solid evidence is misleading.

Tuesday, December 03, 2013

Minimum Wage Redux

In his Times column today, Paul Krugman argues in favor of a higher minimum wage, suggesting that the adverse employment effects are trivial. Unfortunately, Paul presents a highly selective review of the literature. For example, this paper is relevant. From its abstract:

"new evidence based on methods that let the data identify the appropriate control groups leads to stronger evidence of disemployment effects, with teen employment elasticities near −0.3. We conclude that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage."

About Me

I am the Robert M. Beren Professor of Economics at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.